Like Spain, Portugal Hopes to Make Cuts, but It Is Mired in Structural Weakness

LISBON — José Gago da Graça owns a Portuguese real estate company and has two identical apartments in the same building in the heart of Lisbon. One rents for 2,750 euros ($3,480.21) a month, the other for almost 40 times less, 75 euros ($94.91).

The discrepancy is a result of 100-year-old tenancy rules, which have frozen the rent of hundreds of thousands of tenants and protected them against eviction in Portugal. Mr. Gago da Graça has been in a lawsuit for a decade over the apartment that rents for 75 euros. It started after his tenant died in 2000 and her son took over and refused to alter his mother’s contract, which dates to the 1960s.

“We’re the only country in Europe that doesn’t have a free housing market, and that’s just amazing,” Mr. Gago da Graça said.

Rules like these, which economists also blame for contributing to Portugal’s private debt load, help explain why this nation of 11 million has followed Greece and Spain into investors’ lines of fire.

The Portuguese government on Thursday copied Spain’s lead in agreeing with the main opposition party on more austerity measures to cut the deficit faster than planned, to 5.1 percent of gross domestic product next year from 9.3 percent last year.

To help restore investor confidence, José Sócrates, the Socialist prime minister, will rely on tax increases and cuts in wages and corporate subsidies to erase 2.1 billion euros ($2.7 billion) more from the deficit. “These measures are necessary to obtain what’s essential, the financing of the Portuguese economy, but also to defend the euro,” Mr. Sócrates said.

Overhauling the tenancy rules, however, was not part of Mr. Sócrates’s latest plan. One fear among investors is that governments across the developed world do not have the courage and power to tackle such longstanding structural weaknesses.

They may struggle even to implement their latest promises because the cuts could bring unrest and economic paralysis.

In Greece, recent protests against austerity measures turned deadly. In Spain, the two main labor unions called on Thursday for all public sector workers to strike on June 2 against the government’s planned salary and benefit cuts.

In Portugal, smaller political parties also urged resistance. Jerónimo de Sousa, head of the Communist Party, said on Portuguese television that “people have to react with protest and struggle.”

Under pressure from other world leaders, the governments in Portugal and Spain are taking similar paths to get their countries back within the euro’s deficit rules. But while there are problems of profligacy common to European nations, and also to the United States, each of the 16 countries in the euro zone has its own economic problems, and differences in legal and social structures that appear most in need of reform.

Portugal’s antiquated tenancy rules, for instance, stem directly from two revolutions that cemented leftist antagonism toward owners and landlords: the first was in 1910, which ended the monarchy, and the second was in 1974, which overthrew a dictatorship and returned Portugal to democracy.

Photo

A Lisbon street. Portugal, like Spain and Greece, is under international pressure to cut its debt.Credit
Ed Alcock for The New York Times

The postrevolution rules helped protect tenants, but also led to a chronic shortage of rental housing. This, in turn, persuaded a new generation of Portuguese to tap recently into low interest rates and buy instead — often in new suburbs — thereby exacerbating the country’s mortgage debt and leaving Portugal, at 7.5 percent, with one of Europe’s lowest savings rates.

“This system of controlled rents is a major problem for the Portuguese economy, but we will probably be waiting for a generational change to have room for institutional reform,” said Cristina Casalinho, chief economist of Banco BPI, a Portuguese bank. Beyond driving housing credit, she added, the system “basically stops flexibility and mobility in the labor market because you can perhaps find a new job in another city, but it will then be very difficult to rent a house there.”

The center-left government of Mr. Sócrates, which has had to run the country with the tacit support of the opposition since losing its outright parliamentary majority last September, appears ill-prepared to scrap Socialism-inspired rules that have strained the housing market while also helping the elderly survive in Western Europe’s poorest country. After Britain, Portugal has the region’s most unequal income distribution, with a minimum monthly salary of just 475 euros ($601), compared with 633 euros ($801) next door in Spain.

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Even before the government announcement Thursday, Portugal’s economic woes had raised social tension. This year, strikes against a freeze on public sector wages created transportation chaos and forced a temporary closing of schools and hospitals.

“Nobody has had the political courage to change something like these rental laws, and I don’t see the situation changing in the short term, even if I don’t think the Portuguese tend to react as dramatically as the Greeks,” said Salvador Posser, who runs a family-owned company that rents out construction equipment.

Besides distorting pricing in the housing market, the tenancy rules have left physical scars. Portugal’s historic city centers are dotted with abandoned and crumbling houses that are either subject to a court dispute or have rental income that cannot cover repair and maintenance costs.

“This economic crisis is clearly keeping our very slow courts even more occupied because of the amount of conflict that it is creating between landlords and tenants,” said Menezes Leitão, a law professor and president of PLA, a property owners association.

Mr. Posser cited a recent estimate that 8 percent of the buildings in central Lisbon were deserted, in large part because of rent-related obstacles. In Porto, the second-largest city, less than 10 percent of inner-city housing is available for rent, which has helped shrink the population by a third over three decades.

“We’re still losing about 30 inhabitants a day,” said Rui Moreira, president of the Porto Commercial Association.

Mr. Moreira, who has a real estate business, added: “We used to be among the biggest savers in Europe until the 1970s and the revolution, but then people here started borrowing, not so much because they wanted to travel or have a fancy car but because they had to buy a home instead of being able to pay rent.”

Portugal is not facing a property market collapse like that in Spain, where the construction boom added 2.8 million homes over five years, of which only 1.5 million were sold, according to research last month from Morgan Stanley.

But in terms of mismanaged public finances, Portugal has been closing the gap with the worst countries in the euro bloc, after its budget deficit rose to 9.3 percent of G.D.P. last year, from 2.8 percent in 2008. Ireland, Greece and Spain are cutting deficits that last year reached, respectively, 14.3 percent, 13.6 percent and 12.2 percent.

Portugal’s borrowing costs have soared, along with those of other weakened euro economies.

The country’s credit rating was downgraded two notches to A-minus recently by Standard & Poor’s, which said the structural weakness of Portugal’s finances and its uncompetitive economy justified a cut.

“The government now needs to make a big adjustment on public accounts,” said Vitor Bento, economics professor at the Catholic University in Lisbon. “By making that and contracting the primary deficit, this will also increase the savings ratio.”

Correction: May 17, 2010

An article on Friday about structural weaknesses in Portugal’s economy misstated, in some copies, the country’s deficit as a percentage of gross domestic product, after the adoption of proposed austerity measures. It would be 4.6 percent, not 5.1 percent. The article also misstated, in some copies, the 2009 budget deficit of Spain as a portion of G.D.P. It is 11.2 percent, not 12.2 percent. The article also omitted the given name of a Portuguese landlord in some copies. He is José Gago da Graça.

A version of this article appears in print on May 14, 2010, on Page B3 of the New York edition with the headline: Like Spain, Portugal Hopes to Make Cuts, but It Is Mired in Structural Weakness. Order Reprints|Today's Paper|Subscribe